Analysts at Bernstein say immediate action is unlikely

Washington's threatened tax inversion crackdown is unlikely to dampen the deal frenzy sweeping the healthcare sector, according to analysis from Bernstein.

The US Treasury last week intensified political pressure on companies planning to use dealmaking to flee America's high corporation tax rate, in a move known as inversion, by suggesting it could take immediate action to crack down on the practice.

The threat spooked investors in British healthcare companies that are either going through an inversion deal or are thought to be potential inversion targets, sending shares sharply down across the sector.

But immediate action is unlikely, according to analysts at Bernstein, citing companies and Washington insiders.

"The rhetoric that is now coming from the Treasury is, in part, sabre-rattling on the part of the Obama administration to try and discourage any further inversions among corporations," they said.

"However, if other companies continue to blatantly pursue tax inversions in disregard of the Administration's message, our consultants suggest that some type of unilateral action from the Treasury will be more likely."

Even so, said the analysts, dealmaking among healthcare companies is unlikely to cool down since the potential for tax inversion is just one of the driving forces.

Mega-mergers in the medical device sector, such as the $43bn deal between America's Medtronic and Ireland's Covidien, are mainly driven by efforts to gain scale and save costs, neither of which are dependent on tax inversions.

Furthermore, the methods by which the US Treasury could punish Medtronic for inverting are unlikely to deter its plan to move to Ireland following the acquisition.

US politicians have mulled moves such as excluding inversion companies from government contracts and forbidding them from shielding their profits by offsetting them against debt.

But such action will barely register with medical device companies, which do not rely on government contracts for their business and tend to have strong cash flows and low debt.

AbbVie's £32bn takeover of Shire would also continue to have strategic rationale without a tax inversion, said the analysts, though it could nonetheless be thwarted by anti-inversion action.

"Will AbbVie seek to walk away if the regulations change? We believe that in this particular case, the devil is in the details.

"Simply ridding the foreign units from US taxes and freeing the cash to work may make the deal worthwhile even if interest is not deductible and more earnings are taxable in the US," they said.

Complications around inversion could, however, be enough to deter Pfizer from making a fresh approach to AstraZeneca after its "final" £69bn offer collapsed in May. But the analysts said the deal was already on shaky ground due to AstraZeneca's reluctance to be bought by its US rival.

"Pfizer's first attempt to acquire AstraZeneca failed principally because of AstraZeneca's near-refusal to enter into discussions," they said.

"Between AstraZeneca's demand for a higher price and the potential changes to inversion, it is not clear to us that this transaction will occur."